You Are Trying to Pick the Least Expensive Car for Your

question 28

Multiple Choice

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, what is the difference in the EAC of the two cars?

• A) $317.88
• B) $310.38
• C) $413.25
• D) $361.13

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Definitions:

Voting Common Stock

Shares in a company that grant the holder the right to vote on corporate matters, such as electing the board of directors.

Fair Value

The market price for divesting an asset or the obligation to liquidate a liability in a harmonious transaction among interchange participants at the established evaluation period.

Book Value

Book value is the value of an asset as it appears on a balance sheet, calculated as the cost of the asset minus any depreciation.

Acquisition Method

The accounting technique used in consolidating the financial statements of a group where one entity has control over another.